A lot can change in a year.
This time last year, the publication of Michael Lewis’s Flash Boys book created something of a storm. We said at the time that book’s perspective was wildly different from the view from the inside. We particularly took exception to loosely supported and inaccurate use of terminology like ‘front running’, or the fact that the markets were ‘rigged’. Not true, we argued, adding ours to the chorus of voices of people who work in the markets.
Roll-on to 2015, and the news making the rounds is a Bank of England study has found that High Frequency Trading helps make markets more efficient. Bloomberg, who first reported the study (repeated in numerous other news media), summarise it thus:
“Electronic trading makes stock markets more efficient by enabling them to react more quickly to new information, the Bank of England working paper concluded”
The authors (full report can be found here) are quoted as saying:
“HFT firms appear to be reacting simultaneously and quickly to new information as it arrives at the marketplace, which make prices more efficient”
The Bank of England study joins a growing list of highly credible sources that have found that automated trading has benefitted the markets – by increasing efficiency, providing liquidity and dramatically reducing the costs to trade through the narrowing of spreads. These sources not only include academic and regulatory institutions (including papers put out by the EIB and SEC), but some of the world’s largest institutional investors (including Vanguard and Blackrock).
The arguments are summarised nicely by Michael Horn, head of trading at Pershing (Bank of New York Mellon Corp), who says:
“Overall, I think it’s a good thing for the market. Spreads have tightened and there’s empirical evidence to support that.”
The Bank of England study notes that additional research is needed, which we fully agree with. It’s great that this year’s debate is anchored in fact, not fantasy.